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HMRC internal manual

Capital Gains Manual

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Private residence relief: settled property: common intention constructive trusts: basic conditions

TCGA92/S225

To establish that there is a constructive trust the taxpayer must demonstrate that both the following conditions are met.

  • There was a common intention that both parties, ie the trustees as legal owners and the beneficiary, would have an interest in the property. See CG65423; and
  • The beneficiary acted to his or her detriment on the basis of that common intention such that it would be inequitable to deny him or her that interest. See CG65425.

If those conditions are met it is necessary to establish the nature of the beneficiary’s interest.

This is summarised in the following extract from the judgment of Sir Nicholas Browne-Wilkinson in Grant v Edwards [1986] EWCA Civ 4 quoted by Lord Justice Chadwick at paragraph 32 in Oxley v Hiscock.

  1. The nature of the substantive right: [1971] AC 886, 905B-G
If the legal estate in the joint home is vested in only one of the parties ('the legal owner') the other party ('the claimant'), in order to establish a beneficial interest, has to establish a constructive trust by showing that it would be inequitable for the legal owner to claim sole beneficial ownership. This requires two matters to be demonstrated: (a) that there was a common intention that both should have a beneficial interest; and (b) that the claimant has acted to his or her detriment on the basis of that common intention.  
  1. The proof of the common intention

 

 

  1. Direct evidence (p 905H). It is clear that mere agreement between the parties that both are to have beneficial interests is sufficient to prove the necessary common intention. Other passages in the speech point to the admissibility and relevance of other possible forms of direct evidence of such intention: see pp 907C and p 908C.
  2. Inferred common intention (pp.906A-908D). Lord Diplock points out that, even where parties have not used express words to communicate their intention (and therefore there is no direct evidence), the court can infer from their actions an intention that they shall both have an interest in the house. This part of his speech concentrates on the types of evidence from which the courts are most often asked to infer such intention, viz. contributions (direct and indirect) to the deposit, the mortgage instalments or general housekeeping expenses. In this section of the speech, he analyses what types of expenditure are capable of constituting evidence of such common intention: he does not say that if the intention is proved in some other way such contributions are essential to establish the trust.

 

 

  1. The quantification of the right (pp 908D-909)
Once it has been established that the parties had a common intention that both should have a beneficial interest and that the claimant has acted to his detriment, the question may still remain 'what is the extent of the claimant's beneficial interest?' This last section of Lord Diplock's speech shows that here again the direct and indirect contributions made by the parties to the cost of acquisition may be crucially important."  

When applied to TCGA92/S225 this means that the legal owners of the property will claim they held the property as trustees of a constructive trust under which a person occupies the property as a beneficiary of that trust. The legal owners will also be the settlors of the trust as they will have provided the property either by buying it so it can be occupied or by providing a property they already own. The terms of the trust will usually be that the beneficiary had a life interest in the property. See CG65428.